Why Buying a Car with Cash Won't Get You a Better Deal | Capital One automatic navigation (2024)

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When I started in the car business in the 1990s, most new and used car buyers swore by itThe “20/4/10” rule: a 20% down payment on a car loan, paid off in a maximum of four years, with a monthly payment of up to 10% of your net amount.

Unfortunately, today's car buyers are faced with higher prices resulting in longer loan terms, forcing them to give up this financial rule of thumb. And for those trying to avoid higher financing costs by paying cash only for a car, there are many challenges to overcome in today's automotive market.

Cars are more expensive

A generation ago, the most desirable options in most cars were a CD player, a sunroof and cruise control. All valuable options, but practically stone age compared to today's advanced infotainment systems and the blizzard of computer chips and sensors used in modern cars, which now account for as much as 40% of a new car's development costs.

Increased complexity and the rise in raw material prices for all the metals and chips needed to build today's cars have launched car prices into the stratosphere, with the average new car today selling for almost $45,000, up from less than $22,000 early 2000s...

For buyers with today's average income of about $44,000, a 20% down payment on a $25,000 car (that's just over half the average transaction price in July 2022) and a typical loan rate of 4.85% for four years means a monthly price of $460 or so. payment before tax.

This results in more than 30% of a salary of approximately €1,500, which is far above the old guideline of 10%.

Instead of locking into four-year loans, today's buyers are spreading the cost of higher car prices over longer periods. More than a third of car loans now have terms of six years or longer, and average monthly payments range from $488 for used cars to $644 for new cars.

Extending a $25,000 car loan to 72 months drops payments to $321 per month, bringing things to a more palatable level of 21% of the average take-home pay.

To complicate matters further, the price increase could also mean less cash available to the average car buyer. Therefore, a 10% payout may be the new 20% for some customers.

Financial customers are the new kings, not cash buyers

Banks – and the car dealers who accept their loans – make much more money from a buyer who finances a larger amount for a longer period of time than the “one and done” cash buyer. This difference can add up to more than $15,000 in potential profit, which dealers often get a cut of through sales incentives.

Low inventory levels mean fewer opportunities to purchase cash

As of May 2022, there were fewer than a million new cars for sale nationwide. Some of the most popular vehicles – vanTesla Model YUnpleasantFord Maverick—can no longer be ordered for the rest of 2022 due to chip shortages. That shortage has led to rising car prices. With fewer cars and trucks to sell and costs remaining flat for most car dealers, profit per car now surpasses $5,000 in 2022, up from just over $2,100 in 2021.

This means that the financial customer, who is typically more lucrative to serve than the cash buyer, will be a dealer's customer of choice. You can buy a car for cash. But all things being equal, you'll now pay a higher purchase price for that privilege, and you shouldn't expect dealers to give you a discount on the price because you can pay for it all at once. They would probably prefer to have the monthly payments long term and take advantage of a loan.

If you want to buy a car with cash, consider waiting for the market to change, or investing in the spread between your borrowing rate and the risk-free return of an inflation-indexed i-bond with the U.S. Treasury, which is currently of 9.62 percent.